The ADP Institute (Automatic Data Processing, which books job creations in the private sector) psychologically prepared us for a mediocre March in terms of job creation: +189,000 against 212,000 in February, while the job market consensus expected 230,000 to 250,000.
Nothing to worry about since ADP’s statisticians generously offered a set of under-evaluations ranging from +50,000 to +80,000 since fall 2014. As a result, we have a base comprised of 190,000 + 50,000 = 240,000 … straight in the middle range.
If ADP was “right” in March, the cynics would have argued that a broken clock tells the correct times twice a day .… Fortunately, ADP is once again absolutely wrong, since the U.S. economy generated only 126,000 jobs in March (63,000 less than expected) according to the official figures given by the BLS (Bureau of Labor Statistics).
It amounts to a 52 percent drop compared to February (after a -40,000 revision), that is almost -60 percent compared to the initial estimation (295,000). It is 169,000 less than the previous month. … I don’t know if I am easily impressed but such a gap in four (and a half) weeks immerses me in an abyss of perplexity.
So What Is Going On Then?
I do not even know what to type anymore when BLS informs us that despite a job market hitting the worst drawback since the end of 2013, the unemployment rate remains stable at 5.5 percent.
The explanation dwells on the 0.1 point decline of the active population (that is about -100,000 employable people) to 62.7 percent. It is due to early retirement, lack of proper training, absence of personal means of transportation (to join Uber) and lost hope in finding a new job.
While the Fed’s quantitative easing stopped just four months ago (instantly relayed by that of the ECB), the participation rate in the U.S. job market is at an all-time low of 30 years.
Despite the massive $3,700 billion injection of liquidity the U.S. gained since the 2008 meltdown, the situation of the active population has constantly worsened for the last six years … and in March 2015, we are hitting rock bottom! Far from deploring the situation, Wall Street is celebrating, or at least taking up the opportunity for a rebound.
It is Jan Hatzuis, Goldman Sachs’s chief strategist, who was right since last Wednesday: markets won’t have to fear to see the Fed start a tightening trend of the conditions for credit before next December (57 percent chance), if not January 2016 (72 percent chance). It is an open bar with a binging policy (invitations from BOJ and ECB) at least until September and honestly, all the better!
Not Really, No …
Of course not, not “all the better” for the job seekers and tens of thousands of American citizens who do not have access to the job market anymore … but think about the several thousand miserable traders who have huge leveraged positions on the derivatives market and who will ultimately be forced to cut these thousands of billions of dollars if the cost of carry (the cost of credit funding) suddenly increased.
The outstanding securities bought on credits represent 360 percent of Wall Street capitalization. For the ones who love funny analogies, it is the same ratio as September 1929 but it remains nonetheless under the 500 percent of March 2000, which remains unbeatable.
At the same time, traders are at an all-time high confidence level (84 percent), with only 16 percent having against-the-market-positions; and even there, it encompasses cover strategies put in place by the more aggressively bullish operators.
In regard to the capitalization/GDP ratio, Wall Street wanders in the highest levels, with a record of 1.33 (or 133 percent GDP). Once more, it represents historically high levels that have never been sustainable for more than a few months. But that was before!
Before the central banks enacted the prices of the quasi-totality of assets, before the BOJ (after becoming the sole buyer of Japanese bond issuances) had also become the chief daily purchaser — and by far — in Tokyo.
There is More That is Interesting on the Market, Fortunately …
This framework, where prices are administrated and go up as bad news emerges, is not technically or intellectually enthralling. Therefore, let’s catch a glance at the last “Four Witches” session (March 20) and heed the raw materials valuations.
Let’s be real, this section of the market will not awake from the Easter bell ring to strengthen its position this week nor the following one.
Nevertheless, volatility bursts can occur — upwards or downwards — following geopolitical activities … and fluctuations ranging from 10 to 15 percent are perfectly exploitable on regulated and liquid markets such as copper, aluminum or oil (BRENT or WTI).
It is better to bet against the market, the same way as happened in the oil market as the “saloon’s doors” sequence enfolded following the agreement limiting the Iranian nuclear program signed abruptly in Lausanne last Thursday.
Oil specialists foresee a swift lifting of sanctions. The latter would have led to Iranian oil exports returning to a normal level as soon as a definitive agreement is signed come June (until then, many protagonists will attempt to scupper the lifting of sanction by any means necessary).
But whatever the progress of negotiations and goodwill of Tehran, a recovery of exports at the previous level (1.5 million barrels per day) will not occur before 2016. Iran will not export anymore barrels before summer, since the current sanctions remains in place until June 30.
Geopolitics Resumes Its Position
I mentioned against-the-market strategies since a lot of operators are getting ready to take care of an imminent oil overabundance (the latter having dropped back close to $48 last Thursday in New York). Nevertheless, the way things are perceived changed last weekend, entailing a 6 percent rebound on WTI and NYMEX.
It is not impossible that the operations led by the Sunnis (Saudi Arabia, UAE and Qatar) in Yemen will continue while Shiite rebels conquer strategic points in the country and in the capital, despite the air-strikes on their bastions for a week.
Who knows what’s next if Saudi Arabia decides to launch a field operation in Yemen. In fact, it is not just a religious war (Sunni against Shiite) but also an indirect conflict between the two chief regional oil superpowers, which are Iran and Saudi Arabia … and Iraq — with its cheap black gold — as the principal stake.
In case of a long term lull in Yemen (if the legal government resumes control of the country or signs an agreement with the rebels), oil prices could drop back under $45 and even reach an annual low under $40.
In the case of a regional flare-up, which seems unlikely, the possibility of seeing the WTI go up by an additional 10 percent (close to $57) exists. Nevertheless, it is only beyond this threshold that the oil rebound could turn “parabolic.”
By then, it will be more relevant to sell rebounds, such as the $5 rebound which occurred last Thursday. U.S. employment figures have temporally weakened the dollar, which contributes to symmetrically driving up the barrel … but also the slowing down of U.S. activity in a context of lasting overproduction of shale gas which should continue to drag the market down.